The peso is falling and it can’t get up

As I scribe these words the Philippine peso is languishing below 45 to the dollar, at 45.002 per greenback. The peso is worth, in dollar terms, about half of what is was in 1994. Which means, for kababayan working in the Commonwealth, they’ve essentially received a raise, since their dollar earnings buy more pesos now.

I’m no Johnny come lately on this topic. On July 21, 1997, in this very column I warned that the peso was on a nasty devaluation slide, and since then I’ve ventured a couple of similar warnings over the years. The strategy for kababayan remains simple: you’re far better off keeping as much of your money in dollars as possible, since the peso is more likely to weaken than strengthen.

All sorts of things make currency values fluctuate, and a lot of these things can’t be predicted with much, if any, accuracy.
Interest rate differentials between countries are the main driving force behind currency value shifts, at least in the short term, since interest rates influence the demand for bonds and the consequent demand for the currencies that the bonds are issued in.

In the longer term, however, other economic fundamentals enter the picture. When it comes to third world countries, it’s not a bad idea to roughly estimate the future value of the currency as a function of the future productivity of the economy. The more messed up an economy is, the more gun shy people will be about holding currency tied to that economy.

And as far as the Philippines goes, there’s no room for economic optimism. The country remains far behind such economic losers as Turkey, Malaysia, Thailand, Mexico, Brazil… and, well, the list goes on and on and on.
Hence, a lot of bright, talented, and hard working people are forced to leave for foreign shores in order to have any hope at all of getting paid an even remotely decent wage.

And that sad fact isn’t going to change in the foreseeable future. Though economic growth is weighing in at a respectable 3.4% annual rate now, we have to consider the 2.3% growth rate of the population. The economic pie is getting a little bigger, but there are also a lot more people claiming a slice of it.
Economic growth per person, then, is almost nil. A lot of other factors also count against the peso, but they’re boringly technical and I’ll spare you the litany.

On the brighter side of things, the country boats a high literacy rate (94%). In terms of natural and human resources, the Philippines is one well-endowed place. But that’s like having a strong locomotive without a sound economic track to chug along on.

Though it’s far from certain that the peso will fall further, that’s the way I’d bet. I won’t be surprised one little bit if it falls to 50 to the dollar. If I hailed from the Philippines, I’d be keeping my savings in U.S. dollars, to guard against the risk of a continued peso slide. Sure–who knows?–the peso may get a little stronger, but it also might get a lot weaker. I’ll predict: weaker.